The past year has seen unprecedented change and the industry and regulatory agendas continue to march on at considerable pace. Given Brexit, questions remain around the likely direction of future interconnectivity with the UK and, in the absence of clarity, the hard stop date is March 2019.
Key regulatory changes and developments are set out below, categorised according to impact on the industry in Ireland and the UK. Brexit naturally means there is some uncertainty about which future EU-related regulations or directives will apply to the industry in the UK and whether there is any divergence in the medium to longer term, which will impact on the Irish market.
CSDR was implemented on 17 September 2014. The aim of CSDR is to harmonise certain aspects of the settlement cycle and settlement discipline and to provide a set of common requirements for a Central Securities Depository (CSD) operating securities settlement systems across the EU. CSDR plays a pivotal role for post-trade harmonisation efforts in Europe, enhancing the legal and operational conditions for cross-border settlement in the EU. Third-country CSDs need to be recognised by ESMA to offer services to EU participants and issuers, fulfilling certain requirements. Prior to recognition, the EC must adopt an implementing act determining, amongst other issues, that the legal and supervisory arrangements of the relevant third country imposes legally binding requirements which are equivalent to those contained in CSDR.
Euroclear UK & Ireland Ltd (EUI, the operator of CREST) will, post-Brexit, become a third-country (non-EU) CSD. As such, under current rules, EUI/CREST as currently constituted, will no longer qualify as an EU CSD to service the Irish market. That will require EUI to split into EUK and EIR so that EIR can commence servicing the Irish market. That must be in place by March 2019. Post Brexit, absent equivalence or should we now call it ’regulatory alignment’ (and we must assume a ’Hard Brexit’ unless and until we receive confirmation of a softer regime), CREST will become a third-country CSD and its operator, EUI, will need to establish a separate Irish CSD. As you can imagine, that is not just a simple copy and paste of the CREST system with Irish IE ISINs moving from EUK to EIR. Many Irish securities, both equities and ETFs, are dual listed and settle cash in both UK and in Ireland within a single liquidity pool while others are solely listed in GBP on LSE. EUI had indicated in late June that while confident of achieving operational and legal separation by March 2019, they were not confident at that time of delivering other than EUR settlement to Irish securities in that timeline.
Through the EUI User Group Ireland (formerly the Irish Market Advisory Committee of Euroclear), Link Registrars Limited raised serious concerns on the impact on Irish issuers settling in GBP and USD. Approximately two thirds of all trading in Irish securities is non-euro, split between GBP and USD. Four Irish issuers are constituents of the FTSE 100 with a further three being constituents of the FTSE 250 or FTSE All Share. A GBP quotation on the LSE is a requirement for FTSE Index inclusion. The bulk of USD trading on Irish ISINs is for ETFs/ETPs though some USD trading does occur on equities.
EUI is seeking to maintain multi-currency settlement for EIR, and GBP/USD settlement for EUK, post-split within the separation timeframe. This model requires regulatory approval in Ireland, the UK and the EU.
At time of going to press, a discussion paper is anticipated from Euroclear to which issuers and all market participants can provide feedback.
Integrity of ’shares in issue’
The CSDR also requires that CSDs must have appropriate rules and procedures to help ensure the ‘integrity of the issue’ of securities it admits to its system. Furthermore ‘undue securities creation’ is not permitted within a Securities Settlement System (SSS) operated by a CSD. Where entities other than a CSD are involved in maintaining the integrity of the issue, adequate cooperation and information exchange measures must be organised by the CSD and the registrar to ensure the integrity of the issue is maintained. Issuers of securities additionally retain their existing responsibilities under UK and Irish corporate law. To satisfy the new CSDR requirement and to help prevent future operational incidents where incorrect securities balances are created within the CREST system, EUI is introducing additional validation to the issuance process in line with the requirements of Article 25 and Article 37 of the CSDR, insofar as they relate to the creation of securities in a CSD. These changes to the CREST system are set out in the below Euroclear timeline.
Less critically for issuers but impacting the length of the registrar’s business day, the CSDR also requires more frequent reconciliation of registers (going from quarterly to fortnightly) and enhanced requirements for controlling the issue of securities into the CREST system. These changes come on top of those already undertaken to accommodate the extension to the CHAPS and CREST settlement day, introduced in 2016.
MIFID II was implemented on 3 January 2018. The impact to the industry and market participants is enormous, including increased numbers and types of transacting reports, new requirements regarding the issuing of client statements and T&Cs, enhanced operations and compliance procedures and new share dealing best execution requirements. Reporting itself will be a huge challenge with circa 20 fields reportable under the current MIFID arrangements increasing to over 60 in the MIFID II regulations. Online share dealing platforms enable shareholders to quickly and efficiently buy and sell shares online. Under MIFID II significantly greater reconciliations and regulatory processes will be required to support these services. The implications of CSDR and MIFID II for the industry require considerable additional investment in terms of resource, training and system enhancements that extend beyond business as usual and will inevitably lead to cost increases for impacted services.
MiFID II, MiFIR (Markets in Financial Instruments Regulation) and regulatory developments in Transaction Reporting
The European Markets and Securities Association (ESMA) guidance was published in October 2015, with a view to implementation in January 2017. However, to ’take account of the exceptional technical implementation challenges faced by regulators and market participants’ the European Commission announced last year that it had delayed implementation of the directive until 3 January 2018.
The main features of the changes are:-
The EU GDPR will be implemented on 25 May 2018, replacing the existing data protection framework under the EU Data Protection Directive.
For all companies future GDPR requirements should be sitting amongst the top priorities for action in advance of implementation. The enhanced compliance, plus increased sanctions of the GDPR, requires significant changes in the world of data privacy. Now, more than ever, the business world and our personal lives rely on exchanges of digital personal data. What trading company, social media platform or services provider is not dependent on a user or consumer of personal data? Under these plans individuals will have more control over their personal data and those who hold the data, or process it, will have to ensure greater degrees of protection, transparency and availability.
Under GDPR, individuals will have more control over their data by having the right to be forgotten or ask for their personal data to be erased. This will also mean that people can ask social media channels to delete information they posted in their childhood. The reliance on default opt-outs or pre-selected ‘tick boxes’ to give consent for organisations to collect personal data will also become a thing of the past. The Data Protection Commissioner will have more power to defend consumer interests and issue higher fines (up to €20m or 4% of global turnover, in cases of the most serious data breaches).
With Brexit negotiations having now commenced, resource pressures within the UK government has forced the relevant department, BEIS, to make the difficult decision to pause work on Dematerialisation until 2019. In the meantime, the Irish market will continue to develop the Dematerialisation model whilst keeping a watching eye on UK developments.
This note is for general information purposes only and is not intended to provide specific advice.